pbbIX index tells harsh tale about offices, but lettings provide hope

Germany's office investment market continues to plumb the depths, with various indices followed by REFIRE showing the lowest readings since the heart of the financial crisis - and on a par with the slump which set in when the dotcom bubble burst, twenty years ago.

The quarterly pbbIX office property index, published by Munich bank pbb Deutsche Pfandbriefbank in co-operation with Pfandbrief banks' association vdp. The index family comprises a composite index, as well as seven sub indices tracking the key German office property markets of Berlin, Cologne, Dusseldorf, Frankfurt/Main, Hamburg, Munich and Stuttgart, plus their respective catchment areas. (In the index, zero corresponds to the long-term trend, while above zero the market is better than the long term-average. From 1.0 upwards, we're talking boom conditions.)

For Q1 2021, the index fell for the third time to now -1.51 points from -1-38 in the previous quarter, and continuing the slowdown that began in Q2 2020 with the onset of the pandemic. This reflects much lower investment into the office sector, plus the overall pandemic related plunge in economic activity. Only Berlin has proved fairly stable, with the regional index falling from -0.85 to -0.94.

Figures from Real Capital Analytics show that inflows into office real estate fell from €7.3 billion in Q4 2020 to €2.1 billion in Q1 2021. The decline in overall economic activity was due to weaker domestic demand, which was only partially offset by comparatively good demand from abroad.

The picture on the lettings market is brighter, where performance in the quarter held steady with the previous three quarters. Higher vacancies in the past two quarters have risen slightly to about 4% across all the BIG-7 markets, but has so far not impacted on prime rents.

Outside the BIG-7, regional markets are also having difficulties, but with big regional differences.

Commenting on the performance of the office markets recently, Ralf Kemper, head of valuation and transactions advisory at JLL Germany in Frankfurt, said: "The braking effect of COVID has been noticeable in the first few months of 2021, where prices have been unable to show any tangible impetus from either the rental markets or the investment markets.

"Despite a large number of supportive measures, there were recessionary developments in some sectors of the real economy in 2020. In the coming months, particularly when the exemptions for insolvency applications no longer apply from May, we will see to what extent companies were able to defy the pandemic. In contrast to these developments, the DAX went from high to high." 

"The indifferent economic situation continues to mean uncertainty for many companies, with its retarding effect on the real estate markets. However, the top segment of the office market is likely to remain unaffected by negative developments in rents and yields for the time being. This is based on continued low vacancy rates and a tenant mix in these locations with predominantly solvent, multinational companies.”

"A lot depends on how quickly and with what degree of damage we will get through the third wave of Corona infection. In any case, the latest economic data from the federal government give cause for cautious optimism." 

“Looking at investor behaviour, the signs are good for significantly more investment activity in the second half. There is plenty of capital looking for a good home, and pressure to achieve 2021 investment targets is growing by the month, with few transactions done. Positive impulses from the rental markets should help along decision-making in this respect.”

“Other parameters , such as the interest rate environment, remain positive for real estate investors, so increased activity is to be expected on the buyer side. Product availability, especially in the prime segment, should also increase significantly: The number of tenders for sales mandates has been far above average over the past three months. 

“In short”, said Kemper, “we expect a hot summer and a strong year-end quarter. Renewed yield compression as well as a further price increase for prime assets are therefore not unlikely."